How to Make Best out of Credit Cards

Credit cards are one of the most powerful financial tools available in the market which touches a person’s daily life. If you are aware of the pros and cons of this tool, you can probably make the best out of your credit cards which may just be used for making day to day purchases. After reading through this article you may start using your card which is lying in your drawer or if you don’t have one, you may even want to apply for one. Before going ahead, you may want to have a read at our article How Credit Cards Work.

Benefits of Having a Credit Card

Ease of life  & Security

How comfortable are you in carrying a bunch of notes versus a small card in your pocket. I find it more safe & convenient to carry a credit card which fits nicely in the corner of my wallet. Further, with the upcoming chip & pin technology, it is as safe as a Bank’s ATM card. If you loose it, just call up the respective bank’s hotline and they shall disable the card. Can you think this could have been possible with your cash pile ? Since a credit card is not connected to a bank account, hence maximum amount of loss in case of any possible theft would be upto the credit limit on the card. This is contrary to a debit card whereby the maximum amount of loss can be upto your entire bank balance (For some of the lucky ones, this can be in several lakhs) !

Cleaner Bank Statements

If you have been using your bank’s debit card for your day to day purchases, you may notice that your bank statement would be running into several pages. If you are hunting for a specific bank transaction such as interest credit, dividend, etc. it would be a night mare. I find it very convenient to do all of my shopping / other transactions via my credit card and at the end of the month there is just one entry in my bank statement towards the payment made to the credit card. Hence a lot cleaner bank account and eases up the administrative hassles.

Free Credit

This is one of the best advantage of using a credit card. To understand it, let me explain how a credit card works. Lets say that your billing cycle for the credit card is 1st of a month to 31st of the month. Any transactions made during this period get accumulated and at the end of the month you are billed by the credit card company with a consolidated statement for the entire month. From the date of this statement (31st), you generally have 20 days to make the payment. Hence, for example if you purchased a Television worth Rs. 100,000 on 1st of January 2012 with your credit card, you would be billed by the credit card company on 31st January 2012 and would have to pay for the same by 20th February 2012. If you look into it closely, you possessed the TV on 1st Jan 2012, but had 51 days (31 days in Jan and 20 days in Feb) to make the payment. In essence you enjoyed an interest free Rs. 100,000 loan for 51 days. If you would have invested Rs. 100,000 in money market for 51 days, you would have earned over Rs. 1,250 as interest (assuming current interest rate of 9%).

Reduce Interest Payouts via Promotional Balance Transfers Offers

You can use the promotional balance transfer offers to transfer your immediate payment liability on an existing credit card to a future date. By this way you can avoid paying your credit card dues and pay off your other costly interest paying liabilities with your existing liquid funds. For example on the date of payment of your credit card dues (1 Jan 2012) you have Rs. 50K in your bank. You have two options on this date – either settle your credit card dues of Rs. 50K or repay your personal loan of Rs. 50K for which you have to pay around 15% interest rate. You can use a promotional Balance transfer rates to shift your credit card dues to a new credit card for 6 months (30 June 2012) and use your liquid funds to repay your personal loan immediately. After the end of the balance transfer promotional period (on 30 June 2012), you can repay your credit card dues or take a personal loan to repay your credit card dues. In this exercise you would have prevented the payment of Personal loan interest of 15% for 6 months and paid approx 4-8% towards Balance Transfer offer. Net, you would have reduced your interest payouts.

Online Payments Security

If you have used ebay, travel website or any other online websites, you would have noticed that generally an option is available to pay via Netbanking (from your bank), Debit Card or Credit Card. Unless the merchant charges me extra for making payments via a credit card, I would never want to use my Netbanking or Debit card for online shopping. The reason being, the credit card company generally protects me as a buyer against fraudulent transactions and would refund me the amount if the transaction is fraudulent. Unlike a normal purchase on a street merchant, in online shopping you generally don’t see the merchant physically. Hence I would like to secure me from fraudulent vendors ! I personally bought a Ray Ban spectacles from an online merchant for Rs. 12,000. The merchant took the payment but never dispatched the glasses. Finally I reported it to my credit card company and within a week they refunded the amount into my credit card account. I was so relieved and from that day I have used only credit cards for online payments.

 Reward Points

Most of the credit card companies try to incorporate some or the other kind of reward points structure in their credit card schemes. For example, if you purchase anything for Rs. 10o, you would get 1 reward point in your credit card account. Over a period of time you tend to gather a lot of such reward points which can be used towards buying gift vouchers, holiday discounts, flight tickets, etc. I found an interesting article published by my fellow blogger Mr. Shabbir Bhimani (http://shabbir.in/manage-credit-cards/). Please refer to “The Benefits” section of his article for details on how reward points practically work and show up in credit card statement.

Enhancing Credit History

If you reflect enhanced usage of your credit card account, your credit card company may increase your credit limit as a part of their regular review of your credit line usage. Also, with changes in your financial situation such as increase in your salary, you can request for the increase in your credit limit of your credit card. Generally a higher credit limit reflects positively on your credit history maintained by CIBIL as it reflects availability of credit to a person. If you want more information on Credit History, please read our article Improve Your Credit History – Timeline of Your Current & Future Financial Image

Watchout for the following cons of credit cards :

1. Impulsive buying

This is one of the biggest disadvantage of having a credit card or infact any plastic card. With the ease of making payment comes a big responsibility to make sure that you don’t end up over spending just because you can pay it easily. It also goes in the favour of the shop keeper whereby even if a person is not carrying sufficient cash, they can easily make a payment towards a ‘not so necessary’ product based upon impulsive shopping. Take an example that you are walking past a shop in a mall displaying a new mobile handset costing Rs. 35,000. You do not have funds in your bank account and also are only carrying Rs. 5000 cash in your pocket. If you do not have a credit card, then possibly you may not be able to buy this mobile currently and may decide upon to come again tomorrow with sufficient cash. You may agree that once you are at home, you may realise that you actually don’t need a new mobile and your impulsive desire to purchase the mobile gets eliminated. Alternatively if you had a credit card with a Rs. 50,000 limit, then the biggest hurdle between you and your purchase (the required available funds) no more remains. The shopkeeper and your rushing adrenalin may finally end you being a successful (unfortunately) buyer of the mobile phone and keep the economy booming… though you may realise you may have to squander for funds at the due date of your credit card payment.

2. High Interest Rates

Should you forget to repay your credit card dues on time, you would be charged an interest rate of 2-3% per month which arrives to around 24-36% per annum interest rate. This is financially one of the most irresponsible behaviour and often one of the most common reasons which traps a person in the debt circle. It is not that a person really loves paying such interest, but generally most of the time such late payments happen because of sheer carelessness to make the payment on time. The best way to avoid such charges is to instruct your credit card company to deduct the payment of your card from your bank account automatically on the due date.

3. Screwing Up of Credit History

While credit card can be your best tool to enhance your credit history, they can also be one of the most dangerous tool to screw up your credit history and hence limiting your financial options to take a loan in future. It may sound relatively small that you did not pay your credit card company an amount of Rs. 1000 on due date but you paid them shortly after the due date. Every time you do not pay the credit card bill on time, your credit history maintained with CIBIL shows that you defaulted upon your credit card payment. The more this happens, the more red ticks you get on your credit history and hence affecting your credit score.

Some credit cards come with an annual credit card fees. This may range from anywhere to Rs. 100 to several thousands of rupees. Credit card companies justify such annual fees by providing additional benefits which are provided to the card holder. A few examples of such fees are free lounges at airports, additional reward points, cash backs,  discounts, etc. However, you may want to do a quick calculation to check if those yearly fees are actually worth it or would you want to cancel these credit cards and switch to the cards which don’t come up with annual fees.

Related Posts:

• How Credit Cards Work
• NRIs – How to Leverage on Low Interest Rates